by Tina Orem @NerdWallet
You’ve made it through tax season after spending hours toiling over your return — it’s OK to stop thinking about taxes now, right?
Not so fast. Tax pros say there are a few planning tricks you can try right now, while the pain is still fresh and your paperwork is close at hand, to make tax prep (and your tax bill) lighter next year.
You may be having too little tax withheld from your paycheck. Change your withholdings now by filing a new Form W-4 with your employer. It could help you avoid having to scrape up money to pay a surprise tax bill next year, says Scott Stone, a certified public accountant with offices in Missouri and Arkansas.
You may be having too much withheld from your paycheck. Give yourself an immediate pay raise by reducing your withholdings to a level that more closely matches your estimated tax liability. You’ll have more to live on or invest, and you might even snag a tax break if you use the extra cash to make tax-deductible contributions to a retirement plan, Stone says.
The IRS generally doesn’t tax contributions to traditional 401(k)s, so if you start or raise your contributions now, you may be able to deflate your 2018 tax bill little by little over the next several months, says John Lyons, a CPA at Gorfine, Schiller & Gardyn in northern Maryland. (If there’s a company match, you’ll get free money to boot!) Doing this now is a lot less painful than blowing it off until December and then trying to find money for a big contribution.
Now’s also a good time to review the beneficiaries on your 401(k) accounts. “You probably don’t want your ex-wife getting your 401(k),” Lyons warns, “and you might not want your brother to get your 401(k) if you’re married now.”
Create one physical location to dump tax-related stuff you collect throughout the year. Lyons recommends a plastic bin with hanging folders that categorize tax documents by type and that keep receipts for personal expenses separate from receipts for business expenses. “As you’re going through the year, pop it into the hanging folders rather than throwing it into a pile on your desk,” he says.
Stone says his most organized clients use budgeting software and categorize their transactions throughout the year. “They’re focused on honestly budgeting,” he says. “You know, I think that’s kind of a sour word sometimes with people, but when they do budget, they do know more about where their money’s really going and then they’re able to capture that on their tax return — and actually get more deductions that way.”
Charitable donations can be tax-deductible if you itemize on your tax return. But the decision to itemize might be trickier next April because the standard deduction is much higher in 2018, which means some people might be better off taking it next year instead of itemizing. The bottom line: If you end up not itemizing, those donations you’ve been making this year might not lower your tax bill after all, Stone warns.
Thanks to that higher standard deduction, you may want to donate more this year to make itemizing “worth it.” If you’re a multiyear giver, for example, it might make sense for tax purposes to make five years’ worth of donations this year and then nothing over the next four. The important thing is to figure it out now. “If you did want to give a little bit more, you’ve got the whole year to give it, or at least a good chunk of it, versus finding out in November or December,” Stone says. “Then it’s harder to come up with that much money.”